Why Not Pay Cash?

Mr. Cooley is Associate Professor of Eco­nomics at OhioNorthernUniversity.

Often said—but never too often—is that the government has naught to spend but what it gets from the people, either directly and forthrightly in taxes or serv­ice charges, or indirectly and de­viously by manufacturing new money, the value of which is taken out of the money in our pockets.

When the government taxes a dollar from me, I have a dollar less to spend for groceries and the government has a dollar more for missiles. The wealth of the nation has not been increased a farthing.

When the government gets a dollar by printing or otherwise creating it out of nothing, the people’s stock of dollars is not re­duced but the government’s stock is increased. When the govern­ment spends this new dollar for missiles, it is plain that now, as in the case when the government gets a dollar by taxation, real wealth—steel, fuel, and the like—is taken out of the stock of civilian goods and put into the stock of military goods. The people’s wealth has been reduced, but this time the people have not had to give up their dollar. They still have it. It seems they can have their cake and blow it up at Cape Canaveral, too!

But obviously they cannot. The real wealth represented by the missile is gone just as truly when it is paid for with created money as when it is paid for with tax money.

Some say this is not true when there are unemployed resources, that is, labor, land, and capital. They say that then the govern­ment spending of the newly created dollar sets to work other­wise unproductive resources so that the nation’s total product is increased. This ignores the fact that the nation’s entrepreneurs are continually bidding for the re­sources, and that if certain re­sources are at any moment unem­ployed it is because their owners are holding them for a higher price.

When the government enters the resource market with its abun­dant, newly created money, it out­bids the private entrepreneurs, bidding up the prices of resources. The entrepreneurs, unable to afford the higher prices,”lay off”resources, and there is no net in­crease of employment. In fact, there may be a decrease. It is easy to see and count the resources that the government puts to work, but those that private entrepre­neurs lay off are not so apparent.

If government creation of money by “borrowing” from the banks nets the economy nothing, why does Congress insist on spend­ing more money than it taxes from the people? Taxing at least is straightforward and direct and brutal, while this other process is deceptive and devious. Anyone can understand taxing, but not one person in a thousand sees through the sleight-of-hand known as deficit financing.

Taxation Without Representation

Deficit financing and the infla­tion it engenders is essentially taxation without representation, a fiscal process by which the federal government filches from its people without their authorization, even without their knowledge.

When the government spends more than it currently collects in taxes or voluntary payments, as ours has done almost every year for a quarter of a century, the growing federal debt gives rise to the fiction that the burden has been postponed—passed on to future generations. Even if this were true, how could we in this prosperous era justify shifting our burden to our children? We have no cause to assume that they will be better off than we are—that they will be able to pay not only their own bills but part of ours.

But it is not true. He who thinks a part of the cost of gov­ernment is being postponed by deficit financing is hoodwinking himself. If one-fourth of the real wealth produced this year is to be consumed by the government, then only three-fourths will be left for consumers, and the pain of giving up that one-fourth will not be al­leviated one whit by paying for it with bonds rather than with cash.

Even in wartime, deficit financ­ing makes no sense. When a nation goes to war—assuming that the war is supported by the people—this involves transferring the nec­essary part of its resources, in­cluding manpower, from the pro­duction of civilian goods and serv­ices to the production of war goods and the fighting of the war. Hence, the consumers must pull in their belts and consume less in order that Mars may consume more.¹

Illusions of Postponed Costs

Neither the consumers nor Mars can “borrow” goods and services from future generations; they must get along on what is on hand or produced currently. We did not fight the war of 1941-45 with guns made in the 1950′s. We fought the war on a currently bal­anced budget of goods, but we emerged from the war with a money budget unbalanced to the extent of $275,000,000,000. This debt, which imposed on the Ameri­can people an interest charge of more than $7,000,000,000 a year in perpetuity, did not kill a single Jap or German. The interest, which in effect is paid by the group of Americans known as tax­payers to the group known as bondholders, neither adds to nor subtracts from the nation’s wealth. But the debt, having been largely converted into money, has generated inflation to rock the economy in a thousand ways.

If the money needed to pay for the war had been collected from the people currently, this would have reduced their disposable in­come and its upward pressure on price levels. Hence, neither price ceilings nor rationing would have been required. All the cost of po­licing the price control edicts, all the evils fostered by “black mar­keting,” would have been avoided.

Some believe that it would have been impossible to collect enough taxes from the people to pay cash for World War II. One of these is Professor William H. Anderson, author of Taxation and the Amer­ican Economy (Prentice-Hall, 1951). However, he admits that the United States paid by taxation only about 41 per cent of its cost of fighting the war, while Canada and Great Britain managed to pay 50 per cent of their war expense by this method; and he adds, on page 533, “We did not approach either our psychological or taxable capacity under war conditions.” Others hold that had wartime in­come taxes been only 10 to 15 per cent higher than they were, there would have been no postwar in­flation.2

Because the People Object

In the months following the Japanese attack on Pearl Harbor, the American people were fired to a high pitch of determination. To say that they were not willing to pay the cost of whipping the Axis nations—that the war had to be paid for largely by deficit financ­ing—is to accuse the people of not wanting victory enough to pay for it, of being less patriotic than the congressmen who voted the appropriations.

The deficit financing by government implied that the people had to be cajoled into bearing the bur­den of the battle, had to be assured that a part of that burden was being shifted to the future.

And, indeed, a similar implica­tion may be seen in the continuing peacetime deficits. Congress feels that the Treasury must “borrow” money to pay farm subsidies, vet­erans’ benefits, doles to house builders, foreign aid, and the like, because the people are not willing to supply cash for these purposes. And this time, Congress may be right!

Does Congress Know Best?

Assuming that the people are unwilling to pay, are their repre­sentatives warranted in stealing from them? Having found a way to raise money by sleight-of-hand—to rob the people in their sleep, so to speak—our legislators ap­parently are using this method to finance operations they fear the people would not be willing to support openly and directly. Through Washington‘s deficit spending, the American people are losing control over their own wealth.

What are the motives of the congressmen? Evidently, they think it their duty to control the economy. They have so indicated in such enactments as the Employ­ment Act of 1946. Only they, it seems, have the wisdom and ca­pacity to manage the nation, which entails spending the nation’s wealth. When the people demur, Congress spends anyway and writes it on the cuff. Government deficits are financing a burgeon­ing socialism.

The people’s protests are feeble. Whatever the meaning of the 1958 elections, they certainly were not a rebuff to the spenders. The pop­ular, but mistaken, notion is that a part of the cost of government pap is being shifted to the shoul­ders of future Americans. The modern desire to get something for nothing—to reap without sow­ing—is moving the people to coun­tenance successive government deficits during a period when, if ever, they are able to pay cash. Our generation refuses to pay its own bills. We are approaching the nadir of irresponsibility.

William McChesney Martin, Chairman of the Board of Gov­ernors of the Federal Reserve System, reports that foreigners are asking: “Since Americans clearly can afford these expendi­tures (of government) why don’t they pay for them? That is, why don’t they pay in taxes… instead of giving IOU’s or simply printing more paper dollars?” As Mr. Mar­tin so well put it, that is indeed “something to think about."

Footnotes

¹For a more complete exposition of the economics of war, see Human Action by Ludwig von Mises (New Haven: Yale University Press, 1949), chapter XXXIV.

THE FREEMAN

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.